CONFIDENTIAL (FR)

CURRENT ECONOMIC CONDITIONS BY DISTRICT

Prepared for the Federal Open Market Committee

by the Staff

May 14, 1980

TABLE OF CONTENTS

SUMMARY page i

First District-Boston page 1

Second District-New York page 4

Third District-Philadelphia page 7

Fourth District-Cleveland page 10

Fifth District-Richmond page 14

Sixth District-Atlanta page 17

Seventh District-Chicago page 21

Eighth District-St. Louis page 25

Ninth District-Minneapolis page 28

Tenth District-Kansas City page 30

Eleventh District-Dallas page 33

Twelfth District-San Francisco page 36

SUMMARY*

[Asterisk: Prepared by the Federal Reserve Bank of New York.]

Economic activity slowed markedly across the country according

to this month's district reports. Led by a sharp falloff in automobile

sales, consumer spending has weakened substantially. There is evidence

of a contraction in sales of other durable goods as well as of nondurables.

The outlook outside the consumer sector was generally pessimistic as well.

Residential construction has ground to a virtual halt, although nonresidential

building remained brisk in several districts. With a few notable exceptions,

mainly the defense, energy and machine tool industries, a wide crossection

of manufacturing firms reduced their workforces in the face of declining

new orders, shrinking backlogs and rising inventories. Many firms also began

to reassess capital spending plans, but other than in the auto industry, there

has been little actual retrenchment thus far. On the financial scene, despite

lower interest rates, business and consumer loan activity remained dormant.

Agricultural loan demand, however, rose about in line with past seasonal

patterns.

Consumer spending weakened across the nation in April. While the

largest cutbacks continued to be in big-ticket durable items especially autos,

purchases of nondurable goods also slackened. As a result, there were reports

of excessive retail inventories in several districts. In the Chicago area,

where demand was particularly depressed, merchants offered large price

reductions and discount programs to trim accumulating stocks. In contrast,

inventory-sales ratios were reported as acceptable in both Philadelphia and

New York. Auto stocks were generally lean. Nevertheless, many dealerships

have gone out of business in the Atlanta, Dallas and San Francisco regions.

Declining consumer credit card usage nationwide contributed importantly to

weakening demand. Existing credit balances were significantly reduced

according to Atlanta and Richmond, and new credit purchases were down as

much as 20 percent from last April in Dallas with cash buying, as evidenced

in the weak growth in currency nationally, not taking up the slack. Slower

debt collection and bill payments were noted in Philadelphia, Chicago and

San Francisco.

Outside the consumer sector, overall business conditions deteriorated

in recent weeks. Backlogs were worked down, as new orders declined and

lead times were shortened in a variety of industries ranging from

steel in Cleveland and Chicago, to furniture and floor covering in Boston,

to chemicals and electronic supplies in New York. Inventory liquidation was

reported in Philadelphia, Chicago and Kansas City although excessive stocks

are not yet a problem for New York manufacturers. As a result of decreased

production activity, workweeks were shortened in Richmond, Philadelphia and

Chicago, and layoffs—both temporary and permanent—have spread. Both hourly

and salaried employees have been dismissed in the automobile and related

industries in the Chicago and Cleveland areas, while workers in homebuilding

and construction industries have been particularly hard hit in Atlanta and

San Francisco. Reassessments of capital investment plans were underway by

firms in Boston, New York and St. Louis, but little actual retrenchment has

taken place except in the auto industry. As with auto employment, these

cutbacks have been concentrated in the nation's midsection. Input prices

continued to rise in Philadelphia and Kansas City although metals, lumber

and paper prices have all softened in the Boston district.

In contrast to these generally bleak conditions, machine tool

manufacturers in New York and Cleveland appear relatively insulated from

the recession. In Boston, Dallas, San Francisco and St. Louis the manufacturing

base has been strengthened by the defense industry. In Minneapolis, defense

procurement contracts have grown by 30 percent in the last two years.

Residential construction continued to stagnate with activity at

a virtual standstill in Atlanta, Cleveland and St. Louis. Housing starts

are 50 percent below last year in Kansas City. Industries related to home

building have also been especially depressed. The plywood industry in San

Francisco has been operating at less than half capacity. Estimated joblessness

in construction and related industries ranged between 20 and 40 percent in

Chicago. At major lumber and plywood mills in the San Francisco district,

one-sixth or more of the workers have been furloughed. Nonresidential

building, however, remained brisk in Minneapolis, St. Louis and San Francisco.

Reflecting weakening loan demand across the nation, short-

term interest rates declined sharply. Still, relatively high interest rates

and growing economic uncertainty continued to discourage business and consumer

borrowers alike. Moreover, nonprice lending terms were tightened in Kansas

City, New York and San Francisco. Business loan demand eased in all districts

although demand by energy industries remained strong in Dallas. New York

reported some companies shifted to the long-term bond and commercial paper

markets to meet credit needs. Although home mortgage rates are well below

recent peaks, little activity was noted in Kansas City or Cleveland although

in Chicago and St. Louis, a few loans were made. In Atlanta, a surge in

personal bankruptcies was noted. Auto instalment loans were especially weak

in Richmond.

Agricultural loan demand rose seasonally but this sector, as

others, was affected by comparatively high interest rates and escalating

uncertainty. Some bankers are concerned about repayment ability because

of generally rising agricultural costs and declining prices for food.

Farm credit was tight in Chicago but adequate in Atlanta, Dallas and

Richmond. Slower repayments and increased renewals and extensions, how-

ever, became common in Richmond, while in Chicago many farmers restricted

purchases, especially df equipment, in order to ease their credit needs.

FIRST DISTRICT - BOSTON

Signs of recession are becoming more widespread in the First District.

Retail sales have slowed. Homebuilding is depressed although there is still

nonresidential activity. Manufacturers of consumer products have seen a

marked decline in demand, but firms producing capital goods continue to do well.

Input prices are softening. A number of respondents commented on the suddeness

of the change; sales in March were very good but April brought a decided

weakening.

Retail sales have slowed. Department stores and specialty shops have

experienced a falling off in demand. However, sales at discount department

stores remain strong and may even have picked up. The head of a chain with

both general department stores and discount operations observes that discount

sales in early April exceeded expectations while sales of general merchandise

suddenly fell behind. Consumers are said to be very price conscious.

In manufacturing there is a clear distinction between the experience

of firms in consumer related areas and those producing capital goods. Those

selling to consumer markets have seen a sharp deterioration in sales. A wide

range of products has been affected, including such diverse items as appliances,

handtools and hardware, silverware, and eyeglasses. The furniture and floor

covering industries were said to be weak several months ago, but now they are

described as "disaster areas." The weakness at the consumer level is having

second and third order effects although changes at this level are not as severe

as in the manufacture of the consumer goods themselves. Orders are down for

motors used in air conditioners, automobile plastics and for packaging materials.

The capital goods industries, on the other hand, are still doing well. However,

several firms said they are reassesing their own capital spending plans. Defense

remains a source of strength. Input prices are softening. Copper, lead, tin,

and zinc prices are all down from the end of the year. Lumber prices are said

to have weakened a lot and there has been a softening in paper prices. Some

plastics prices remain low even though plastics are petroleum based and costs

have increased sharply.

Loan demand has slowed although two large banks in southern New England

report that demand remains surprisingly strong. Banks are looking carefully

at loan requests.

Professors Samuelson, HouChakker, and Eckstein were available for

comment this month.

Samuelson believes that "the medicine has worked—we are certainly

in a recession." He is not confident, however, that this recession will be

deep and long. Although the demand for domestic autos may remain depressed

for some time, consumption spending generally showed "special signs of

resiliance" until a month or two ago. "The consumer has not learned a

permanent lesson;" so even though the saving rate may rise in the next two

quarters, it is too soon to say that consumers are now adopting more

conservative spending habits. This fundamental strength in consumption

demand ana the general lack of "excess inventories" may limit the size of

the impending slump.

Samuelson believes the large increase in April's unemployment rate

"may contain some noise, but there is still plenty of message for the

Fed." "This is precisely the time for easing off." The declining money

stock coupled with the larger-than-expected drop in interest rates implies

that money demand is very weak. Unless interest rates drop further, money

growth will fall short of the Fed's targets. The Fed allowed interest

rates to rise sharply in 1979 and early 1980 so that money growth would not

exceed the target. Unless it is a "foul weather friend," the Fed must now

allow rates to fall to keep money growth on target and build credibility

for its new operating procedures.

Houthakker sees no radical surprises in the latest economic data.

He still believes real output at the end of this year will equal output for

year-end 1979. His research suggests that consumption and investment

demand will not collapse during 1980.

Houthakker supports the current targets for Ml growth. The Fed,

however, should be prepared to allow interest rates to fall enough so that

money growth does not fall below target. Even if the slump is more severe

than he now foresees, Houthakker encourages the Fed not to revise its money

growth targets.

Eckstein believes real GNP will decline about 8 percent at an

annual rate this quarter led by falling consumption spending; over the

course of the coming recession, output will decline 3.5 percent; and the

unemployment rate will peak at 8.5 percent. Eckstein believes that "the

recent credit controls confused and frightened people," and the lesson he

draws from this experience is that the "government should not play with the

psyche of consumers."

Eckstein believes that the Fed should try to achieve its current

M-1A growth targets. This is a better policy than any other the Fed might

now endorse. "With this monetarist principle, interest rates should

decline sharply and then rebound abruptly later in the year, a V-shaped

profile."

SECOND DISTRICT—NEW YORK

Business activity in the Second District continued to lose momentum

in April. Consumer spending weakened at major department stores across the

district at the same time that automobile sales were lethargic. Outside the

consumer sector, the outlook was generally pessimistic. Manufacturing firms

in many industries have started to reduce their workforces in the face of

declining new orders and shrinking backlogs. Cautious inventory policies,

however, appear to have kept stocks from growing excessive. Many firms also

have began to reassess capital spending plans, but there has been only lim-

ited retrenchment thus far. On the financial side, business loan demand at

major New York City banks slowed as some companies shifted to the long-term

corporate bond and commercial paper markets to meet credit needs.

Consumer spending in the Second District weakened in April. The

eleven-day transit strike in New York City contributed to the downturn at

metropolitan stores, but a similar slackening occurred throughout the region.

While monthly sales comparisons are distorted by the effects of the transit

strike and timing of the early Easter selling season, merchants voiced con-

cern that the recent poor performance of sales was indicative of a more

prolonged economic slowdown. Credit financing of sales fell at a major

department store chain, while another store reported a shift from credit to

cash transactions. This downturn is occuring although relatively little

reportedly is being done by these respondents to directly discourage credit

card usage. In spite of lagging sales, conservative inventory policies have

kept stocks at acceptable levels.

Domestic car sales fell sharply in April. With few exceptions,

dealers in the Second District reported a severe falloff in new car and

truck purchases. In some instances, sales declined by as much as 40 to

50 percent. In the last 10-day selling period in the month, floor traffic

at one dealership reportedly ceased and as a result, no new orders were

being booked. Demand for used cars, however, has remained relatively strong

and their prices are rising sharply due to the increasing scarcity of supply

as potential buyers postpone the replacement of their old models until they

are no longer serviceable. Dealers in New York State were concerned that

the state's usury ceiling on automobile loans was restricting financing.

All of the respondents felt that local financing problems were being exag-

gerated by media coverage, which was scaring away even those customers still

eligible for finance company loans. Dealer stocks are lean, however,

reflecting dim sales prospects and the high cost of financing inventories.

Outside the consumer sector, overall business conditions also have

deteriorated in recent weeks. A sharp, dramatic falloff in new orders and

a shortening in lead times was reported by manufacturers in such diverse

industries as paper products, chemicals, consumer and industrial metals,

electronic and photographic supplies and steel. Several firms have begun

to reduce their staffs both through attrition and layoffs. In some divisions

of a major metals manufacturer, layoffs have affected 30 percent of the

workforce. In contrast to other District producers, machine tool manufac-

turers so far have been relatively insulated from the downturn. Backlogs

at these firms are still growing as new orders remain strong. While some

raw material prices have abated, cost pressures remain intense. Both labor

and energy costs have continued to rise. Despite the uncertain economic

conditions and the high cost of financing, however, relatively few firms

have marked down their capital investment plans. With the exception of a

major chemical firm, which reported excessive inventory stocks, inventories

remain at acceptable levels.

In general, the industrial outlook became more markedly pessimistic

during April. Expectations of a longer and deeper recession have grown.

Upstate business leaders note widespread layoffs in construction and auto-

related industries. Downstate, further economic dislocations are imminent

with the planned closing of a major New Jersey auto plant in June. This

shutdown will result in direct permanent job losses to 3,700 workers in

addition to the 800 already laid off. Further job cutbacks and losses in

income are expected as the ripple effects of this plant closing work through

the local economy. Most respondents do not anticipate a recovery in national

business activity until the first half of 1981. But, with the exception of

a steel industry spokesman who feared the effects of continuing inflation and

foreign competition, the long-run outlook for the 1980's remains positive with

strong growth in demand expected for all products.

The weakening in business activity has been reflected in credit

demands. New York City banks have experienced a sharp easing in business

loan demand, which they expect to continue over the remainder of the year.

While there has been some tightening in non-price lending terms, senior loan

officers attribute most of the weakness to a combination of the recessionary

environment, the lean inventory situation, and some shifting to long-term

financing. Moreover, given the current spread between the prime rate and

commercial paper rates, some firms apparently have recently turned to the

commercial paper market for short-term funds.

THIRD DISTRICT - PHILADELPHIA

Indications from the Third District in May point to a slowdown that is gaining

steam and spreading to a variety of sectors. Manufacturers in the District say industrial

activity has taken another large dip this month, and retailers report sluggish, but still

better than anticipated, sales. Representatives of both sectors say the future holds only

bleak prospects. District bankers say C<JcI loan volume is up from a year ago, but has

virtually dropped off the board since March. Further declines are expected as the U.S.

slips into a recession.

Area manufacturing activity appears to have slowed quite a bit this month,

according to the most recent Business Outlook Survey. About half of the manufacturers

polled in May say general business conditions are worse than they were in April,

continuing the slump in the industrial sector that began nine months ago. Recent trends

in specific indicators of business activity have been consistent with this general decline.

Both new orders and shipments are down again and producers' backlogs have diminished

substantially. Inventory liquidation has continued. On the employment front, almost a

quarter of the respondents to the survey have trimmed their payrolls and cut working

hours.

For the longer term, survey respondents are projecting only a marginal

increase in overall business activity in the next six months. New orders are expected to

increase, with shipments rising as well, but inventories will remain tight. Employers still

foresee some cuts in the average workweek, with fewer predicting layoffs.

Prices are up again in May in the industrial sector. Input costs are higher this

month for about two-thirds of the surveyed manufacturers, while prices of finished goods

they sell have been increased by about half. As for the future, 71 percent of the

respondents expect raw material costs to be higher by November and 62 percent plan

price hikes for their products.

Area retailers report only slight growth in sales in April, with hard goods

bearing the brunt of the slowdown. Current dollar sales are running 1 to 6 percent over

year-ago figures, which is better than was generally anticipated. Most retailers surveyed

had expected a decline in nominal terms of 1 to 2 percent, but balmy summer weather

has bolstered sales to some degree. Having anticipated a slowdown, retailers cut

inventories accordingly, so inventory-sales ratios are in good shape. All retailers

contacted said collection of debt had slowed somewhat, but responses were mixed

regarding consumer willingness to continue to buy on credit.

Local merchants are projecting a continued decline in sales through the next

two quarters, with a possible pickup in December. They feel the election in November

should help, as consumers have traditionally been optimistic after Presidential elections,

and that the overall economy may start to show signs of recovery by year-end.

In the financial sector, bankers report mixed activity in May. Commercial

loan volume is up 10 to 13 percent over a year ago, but activity in the last month has

dropped off sharply. Consumer loans are down, as bankers continue to discourage retail

borrowing. Looking ahead to the next six months, projections indicate that loan volume

will continue to drop as the economy slips deeper into a recession.

Bankers in the Third District are currently quoting a prime rate of 17 1/2

percent. Projections of the prime show a continued drop, leaving the rate 300 to 600

basis points below its current level by the third quarter, and even lower by year-end.

Deposit flows at commercial banks are "not dangerously tight" at this point,

and bankers anticipate improvement as interest rates fall. Many consumers are starting

to move out of money market certificates, as yields drop, and into the longer-term thirty

month certificates in order to lock in a higher return on their money.

FOURTH DISTRICT - CLEVELAND

Respondents in the Fourth District generally agree that the economy

is in the early phases of a deep recession, but opinions vary on the depth

of the recession and the extent of the recovery. Perhaps the most optimistic

comments came from the machine tool officials who still report better-than-

expected strength in new orders. However, the business sector as a whole is

apprehensive amid signs that the slump in automobiles and auto-related products

is spreading to other consumer goods. District banks have experienced declines

in consumer loans, mostly concentrated in auto loans, and a dramatic decline in

the growth of C&I loans as a result of high interest rates and credit restraints.

Housing continues to slump despite declining mortgage rates.

The economic outlook continues to deteriorate, with rising prospects

for a worse than "average" recession. An auto industry economist states that

April figures will show that the recession is no longer concentrated in autos

and housing. A durable-goods producer is concerned that the sharp decline in

April may be a harbinger of a recession rivaling 1973-1975. He, along with

several other economists, expects the second quarter decline in economic

activity to be about the worst of the recession. However, the decline is so

sharp and so sudden that several respondents now see a recovery to be sluggish.

An economist for the steel industry states that firms have not had time to

adjust to the collapse in orders, so that no firm or industry will be in a

position to lead a recovery. A bank economist notes that even the decline in

interest rates is unlikely to provide much stimulus because the decline has

been so sharp that it has raised expectations of further declines in the near

term. A few economists, however, expect a sharp rebound in response to the

rapid decline in interest rates, a tax cut, and completion of inventory

liquidation.

The machine tool industry has not exhibited any major softening in

orders in recent weeks, according to several industry spokesmen. Orders in

nominal terms have held up better-than-expected. Effects of the recession

on the industry will be delayed until the profit squeeze among customers is

intensified and evidence of the severity of the recession is apparent. A

capital-goods producer reports that capital spending plans have not yet been

cancelled. However, a major auto producer recently announced plans to cut

back capital spending over the next few years, except for retooling, and a

steel producer is petitioning the EPA to allow stretching of compliance dead-

lines until cash-flow improves. Nevertheless, an economist for a machine tool

builder states that a decline in machine tool orders (in nominal or real

terms) is unlikely to be as serious as in 1974-1975 because of continued need

for retooling in the automotive industry, strength in the aerospace industry,

a buildup in defense spending and a tendency for some companies to look

beyond the current recession.

Some retailers are uncertain over where the trough in consumer

spending is, and see little happening to build consumer confidence in the

near-term. Among nondurable goods, consumers are reacting to high prices by

reducing usage and shifting to generic names, according to a producer of

household products. Several retailers note a majority of consumer purchases

since February has concentrated on sale items. A spokesman for a major food

chain reports that consumers are shifting to fresh rather than prepared foods,

although frozen food discount stores are thriving. The decline in retail

business is not expected to result in layoffs, but will lead to a reduction

of hours worked, according to an area retailer.

Automobiles and auto-related products continue to be the hardest hit

consumer goods. Spring car sales, according to an industry economist, are

dismal. One official blamed high interest rates, credit restraints, and shift

in consumer preference to 4 cylinder cars for the drop in domestic new car

sales. Some improvement is expected by fall because of new small cars by Ford

and Chrysler. If interest rates drop further and credit restraints are

lifted, auto dealers are not expected to carry large inventories and are

unlikely to discount as heavily as in recent weeks. Several auto dealers

report that the slump in sales also includes used cars, which is unusual for

recessions. Tire shipments, which are 30% below year-ago levels, reflect the

slump in auto sales, although an industry economist states that inventories

are at a two-month level, compared to a nearly three-month supply in 1974-1975.

Gasoline sales are off as much as 10% from year-ago levels as a result of a

shift to more fuel-efficient cars and higher prices, according to a petroleum

economist.

Weakness in consumer spending has led to sharp production cutbacks

among consumer-goods manufacturers and their suppliers. A major producer of

household appliances reports that a weak replacement market, coupled with the

housing slump, has contributed to a widespread decline in consumer durable

goods orders. Order books for steel, according to an industry economist, have

collapsed, with order entries now 50% below month-ago levels and cancellations

well above normal. Except for oil field drilling equipment, the decline in

orders is pervasive and would sustain only 50% of existing steel capacity.

Although still relatively strong, orders in the aluminum industry also dropped

substantially in the last two weeks of April, according to an industry economist.

District bankers report little problem staying within credit restraint

guidelines. High interest rates have finally discouraged C&I loans, according

to a bank economist. Several bankers report that funds are available and an

area manufacturer reports that some banks are initiating offers of expanding

credit lines. An economist in the capital goods industry notes that declining

interest rates have resulted in replacement of old debt, but not much new

borrowing. Several auto dealers report an inability to sell commercial paper

to banks because of bank restrictions on the growth of credit. A bank

economist reports that credit card purchases have also declined and bank

credit card cash advances are off 5% from a January peak.

Mortgage lending rates by S&Ls dropped sharply in recent weeks.

Several S&Ls report lowering mortgage notes from a 16-17% range to a 14-15% range,

with some to 13%, because of weakening demand and declining marginal cost of

funds. However, some officials feel that a 12-13% range may be insufficient

to stimulate housing demand. The severe slump in new housing sales continued

through April and a major regional builder of new houses reports net sales

are 25% of year-ago levels and cancellations have been heavy.

FIFTH DISTRICT - RICHMOND

Most indications are that business activity in the Fifth District slowed

during April. Manufacturers surveyed report declines in shipments, new orders,

and order backlogs. Retail sales also weakened, although much of the decline

may be attributed to durable goods, particularly home furnishings and appliances,

which often involve credit sales. A number of retailers note significant re-

ductions in credit sales. Despite lower interest rates, commercial and indus-

trial loan activity has weakened considerably in recent weeks. The weakness

in consumer credit, especially auto instalment loans, and home mortgage loans

continues. On balance, the high interest rates and increased costs of other

farm inputs have combined to reduce demand for farm loans at banks well below

a year ago. Much slower loan demand than a year earlier was also in evidence

at production credit associations and Federal land banks.

Over half of the District manufacturers surveyed experienced declines

in new orders and order backlogs over the month. Shipments were reported

down by more than a third of the respondents. Inventories of materials were

unchanged and stocks of finished goods rose only very slightly in April.

Nonetheless, more manufacturers find inventories excessive now than a month

ago. Manufacturing employment has shown little change in recent weeks, but

the length of the workweek has fallen at a number of establishments. The decline

in manufacturing activity has been, to date, more remarkable for its breadth

than for its depth. Industries experiencing softness in their particular

markets include textiles, building materials, chemicals, primary metals, and

furniture. This weakness does not seem to pervade any industry, however, but

is affecting individual plants. One sizable plant formerly producing synthetic

fibers and employing over 900 workers has closed permanently.

Recent retail sales activity may be best described as spotty.

According to our directors and retail respondents sales activity in home

furnishings, home improvements, and appliance lines has been very weak.

Activity in other non-auto lines, however, seems to have held up well in

most areas. On balance, retail respondents experienced month-to-month

declines in total sales and in relative sales of big ticket items. In-

ventories at the retail level also fell over the month but remain somewhat

above desired levels.

Expectations of District respondents deteriorated sharply over the

past month. An overwhelming majority of retailers and manufacturers expect

the level of general business activity nationally to worsen over the next

six months. A majority of manufacturers also expect business in their

respective market areas and individual firms to weaken over that time

period. Of retailers surveyed half foresee declining activity within their

market areas and individual firms.

Declines in market interest rates are showing up in consumer loan

markets and mortgage interest rates have fallen 1 to 2 points in many areas.

Large Fifth District banks have kept pace with the money center banks in

lowering their prime lending rates. Nonetheless, commercial and industrial

loan activity has weakened considerably in recent weeks. The weakness

appearing now partly reflects a movement to cheaper, nonbank sources of

funds by large national customers of area banks, especially utilities and

nondurable goods manufacturers. The weakness in consumer credit, especially

auto instalment loans, continues. Outstanding instalment loans at weekly

reporting banks have actually declined over the past month, reflecting

reductions in auto loans and personal cash loans. These declines seem

largely related to changes in consumer attitudes toward borrowing and to

the high price of credit. It has also been reported that consumer attitudes

toward use of credit cards is becoming more conservative, with usage falling

and repayments rising. Delinquencies on consumer loans have not become

a problem to area banks.

Our first quarter survey of farm credit conditions suggests that

District farmers, by and large, have been hard hit by the effects of in-

flation, the sharply higher interest rates, and recent monetary policy

actions. The supply of production credit seems adequate to meet demand

in most sections of the District. On balance, higher interest rates and

increased costs of other farm inputs have combined to reduce demand for farm

loans at banks, production credit associations, and Federal land banks

well below a year ago. Bank supplies of loanable funds declined during

the quarter but remained only slightly below year-earlier levels. While

there is some evidence that liquidity pressures are greater than in the same

period last year, loan-to-deposit ratios of surveyed banks averaged only

fractionally above a year ago. Loan repayment rates have slowed and are

sharply below a year earlier, while renewals or extensions are significantly

higher. Moreover, collateral requirements have risen to a new high.

SIXTH DISTRICT - ATLANTA

District economic conditions were decidedly recessionary. Con-

sumers retrenched, and real sales for merchants contracted. Automobile

dealers continued to face reductions in unit sales. Residential con-

struction and real estate sales crept along at a snail's pace. Although

nonresidential construction was vigorous in some areas, many developers

are postponing construction starts until interest rates recede. Layoffs

advanced sharply at automotive and building materials establishments. A

considerable rise in personal and business bankruptcies occurred.

The normal spurt in spring sales failed to materialize for most

retailers. Excluding automobiles, reports of shrinking retail sales

volumes were typical and represented activity in nearly all parts of the

District. Appreciable reductions in restaurant traffic and credit card

purchases were frequently mentioned. Many retailers observed a pickup

in repayment rates for charge accounts. After a 25-percent decline in

credit report requests, a credit bureau director believes consumers are

in a state of shock and are now sitting on the sidelines.

Automobile dealers struggled with the falloff in sales. Unit

sales were below March figures and sharply below year-ago levels.

Numerous contacts believe potential customers are waiting for automobile

loan rates to descend, and, until then, an upturn in sales is not ex-

pected. Inventories remained at lowest possible levels. The most strik-

ing comment came from an Alabama director who said 21 auto dealers in

the state closed their doors during April.

The residential real estate sector remained in the doldrums.

Housing starts were at very low levels across the District, even in

Florida, and ubiquitous drops in residential building permits did not

augur well for the future. Also, home sales slid drastically in south-

eastern Florida and were off significantly in Birmingham. In a small

northeastern Tennessee city, the inventory of unsold houses was at its

highest level in many years.

Nonresidential construction activity and plans were still

fairly brisk. Numerous announcements regarding hotel, office, and/or

retailing complexes were made; however, most developers were expected to

postpone the commencement of construction until relatively favorable

financing terms can be arranged. The announcements included a large

hotel, office, and retail shopping complex intended to revitalize down-

town Mobile, two substantial complexes in New Orleans, and one in Tampa.

Also, six large-scale projects, including a 50-story World Trade Center,

were in progress or are planned for Miami. The projects in the planning

stages will be delayed until QIV:1980 or QI:1981 due to the lower interest

rates anticipated at that time. Jacksonville and Baton Rouge reported

good nonresidential construction activity. On the other hand, commercial

construction was judged to be at a low ebb in Birmingham and in Tennessee.

Layoffs dealt a resounding blow to automotive and building

materials firms throughout the District. The 'shortfall in auto sales

caused the indefinite layoff of nearly 350 workers at two Mississippi

Packard Electric facilities where automotive wiring harnesses are assem-

bled, 200 employees at GM's Saginaw Steering Gear Division in Decatur,

Alabama, and about 750 workers at the Nashville Ford Glass Plant. Also,

cutbacks at tire manufacturing firms in Alabama, Georgia, and Tennessee

were abundant.

Work force reductions in construction-related industries

peppered the District. ITT-Rayonier laid off about 90 employees at a

lumber mill near Augusta, Georgia, and almost 200 combined at two Florida

lumber mills. St. Regis Paper Company curtailed operations at three

lumber mills in Georgia and one in Florida. Weyerhaeuser shut down a

lumber mill in central Alabama, placing 150 workers on unemployment.

Georgia-Pacific closed indefinitely four plywood mills in the District—

one in Alabama, two in Georgia, and one in Louisiana. The construction

downturn also caused the laying off of 700 workers at a central Alabama

foundry due to a reduction in pipe orders. An Augusta, Georgia, brick

manufacturing concern closed one of six plants, displacing about 100

workers.

Several contacts commented on a surge in bankruptcies. A

southern Alabama contact, who predicts a disaster in the consumer borrow-

ing field, reported an accelerating rate of bankruptcies in his area.

In one central Alabama city, personal bankruptcies jumped from March to

April, and in a northeastern Tennessee city business and personal bank-

ruptcies advanced markedly over year-ago levels. Business loan demand

was very soft in central Alabama despite prime rate reductions. In

central Florida, a banker reported sagging loan demand in all sectors.

Consumer loans were down for a Miami bank and showed no growth at a

large Atlanta bank.

The District's agricultural sector was burdened with widespread

uncertainty created by high interest rates, escalated production costs,

and an unstable, mostly declining, price structure for farm products.

Many encountered a credit crunch and will have a difficult time breaking

even. Hog prices, which have fallen for many months, reached an eight-

year low and, consequently, have depressed prices of broilers, a close

substitute for pork in consumers' diets. Numerous hog producers are

considering leaving the business. Cotton plantings grew by almost 12

percent due to anticipated higher prices, 30 percent above year-ago

levels. Recent periods of dry weather encouraged the rapid planting of

various crops.

SEVarcH DISTRICT - CHICAGO

The business decline that developed on a broad front in March, spread

to additional sectors in April and May. Retail sales have slumped, especially

for large items and luxury goods. Reports of layoffs and short weeks are fre-

quent from manufacturers of a wide variety of consumer and producer goods.

Residential construction activity already has dropped much more than in 197**-

75, and nonresidential activity is expected to weaken in the second half as

existing commitments are worked out. Easing credit conditions of the past

several weeks will have a salutary effect on seme of the businesses, consumers,

and farmers who have been hardest pressed. While gloom prevails in agricul-

tural areas because of poor income prospects, plantings are off to a fine start.

Economists have been revising economic forecasts downward. For

example, one of Chicago's best-known bank economists told reporters on Friday

that conditions have deteriorated faster than expected, and that the recession

may be the "longest and most severe since the 1930s." Among the industries

that have made new cuts in sales estimates for 1980 are motor vehicles, steel,

building materials, farm equipment, and construction equipment.

We have no evidence of an upswing in defense procurement in line with

the Administration's statements. Defense contractors located in this district

say that any acceleration has been in R&D contracts, mainly in New England.

Par chasing managers in Chicago and Milwaukee report that the March

declines in output, employment, new orders, backlogs, and inventories accel-

erated in April. In Milwaukee, where capital goods predominate, April's drop

was described as "precipitous," and reflected preparations dating back 12

months or more when recession ferrs were first expressed. For Milwaukee,

58 percent reported shorter lead times on purchased items in April, -while only

2 percent reported longer lead times, an almost exact reversal of the report

for April 1979* Price increases have moderated with bids reflecting more

competitive markets.

National retailers report sales depressed everywhere, but with major

areas of the Seventh District particularly bad. Consumers have been holding

back on big-ticket items and have restricted credit use. One retailer ex-

presses regret that it will not have to establish a special deposit under the

credit restraint program. Before March, consumer credit was being restricted

mainly by lenders. Now, restraint appears to be more from the demand side.

Inventories that had appeared slim now seen excessive, and reduction programs

are underway. Many retailers have been offering unusual price concessions,

to stimulate sales, e.g., 10 percent store-wide discounts, substantial reduc-

tions on men's clothing, special cuts on multiple purchases, etc. Air travel

has declined since February, and is now expected to be off 6 percent for the

year. Consumers are said to be delaying payments on bills owed to profes-

sionals, and postponing new obligations, especially in the case of dentists.

Prospects for the motor vehicle industry continue to deteriorate.

Further layoffs—temporary, indefinite, or permanent—are reported for parts

and materials plants, as well as assembly plants. Deep cuts, probably perma-

nent, are underway for salaried workers. Capital spending programs for sub-

sequent years are being scaled down, mainly by reducing the number of new

models requiring retooling. So far, regular jobless pay and SUB payments,

increasingly supplemented by "trade adjustment assistance," are helping to

maintain worker incomes. But the longer-term picture is grim for Michigan,

which has almost ko percent of vehicle employment. Michigan concentrates on

the hard-hit big cars and trucks, it has most of the redundant overhead person-

nel, and it has most of the obsolescent plants to be closed.

Revival of the motor vehicle industry will be made more difficult

because of the demise of numerous large dealers, seme located in prosperous

areas, who are essential for maximum sales. Auto companies also complain that

dealers are not carrying adequate stocks to take advantage of sales opportuni-

ties.

Substantial layoffs have occurred, or are scheduled, in the farm and

construction equipment industries. This is significant because the three

largest companies had strikes in the current fiscal y e w that lasted 18, 79 >

and 172 days, respectively.

Orders for steel dropped abruptly in late March and have remained de-

pressed. Cuts by motor vehicles producers continue, and new weakness has

developed in farm and construction equipment, structural steel, and prefab

buildings. A local steel company has reduced its estimate of second quarter

shipments by 15 percent in recent weeks.

Paperboard orders in physical units, which had leveled off in the

spring of 1979, were 6 percent below last year in March, and probably by a

similar margin in April. Many customers have cut back on paperboard orders

as they have reduced workweeks. Production of household appliances, lawn

equipment, outboard motors, and other large consumer goods shipped in boxes

is down more or less sharply.

Home mortgage rates have been dropping rapidly from the 16.5-17 per-

cent peaks posted in mid-April. More important, some new loans are actually

being negotiated again, in contrast to the virtual halt in the March-April

period. The decline in new residential construction will not be reversed

quickly. Too many builders have called off plans for 1980, and some buildup

in finished properties has occurred. In the Chicago area, only 700 permits

for single-faaily homes were issued in the first quarter. This is off 8U

percent from 1978 and 6l percent below the depressed period of 1975. Apart-

ment permits are down almost as much. Reports from other large district

centers are similar. Estimates of the jobless rate for construction workers

range from 20 to Uo percent—with many on short weeks. Demand for ready-mix

concrete, gypsum board, hardboard, lumber, plumbing fixtures, built-in appli-

ances, and carpeting is way off with accompanying layoffs in manufacturing,

distribution, and installation. Layoffs by realtors and title companies axe

also significant.

Tight credit conditions and bleak farm income prospects continue to

have an adverse Impact on Seventh District agriculture. Our survey shows

farmland values down in the first quarter. Since i960 these values dropped

in only one other quarter—in 1977. Average rates on farm loans at rural

banks rose from 13.5 percent in January to 17 percent in April. While bankers

have been rationing credit, they also report a steep decline in demand.

Farmers are restricting purchases of all types, especially equipment. Recent

evidence suggests that rural credit conditions may be easing as outflows of

funds associated with high market rates slow down. Spring plantings have

an excellent start, but scanty rainfall and low topsoil moisture raise concern

about seed gemination.

EIGHTH DISTRICT - ST. LOUIS

Business conditions in the Eighth District continued to deteriorate

in April. Consumer spending for durable goods, such as cars, trucks,

appliances, and home furnishings, declined further and some softening in

nondurable goods, such as clothing, was also noted. New home sales are

reported to be at the lowest rate since the 1974-75 recession.

Manufacturing has slowed further in a number of industries, including

automobile assembly and related industries and home building product

industries. On the positive side, manufacturing activity remains fairly

strong for some capital goods products, particularly defense-oriented and

energy-saving equipment. Nonresidential construction has also held up well,

but fewer new projects were reported. In the financial area, loan demand

has declined rapidly in recent weeks, and most interest rates have dropped

sharply.

Consumer spending is reported to have slackened further in recent

weeks. There has been a sizable reduction in consumer credit demand as

reflected in credit card use. Consequently, retailers report a downturn in

charge balances. Sales of big-ticket items are quite sluggish, and some

soft good sales have also deteriorated, but not to the extent of durable

goods. Sales of both domestic and foreign-built automobiles have continued

to decline in recent weeks, although the decline has been most severe for

large domestic cars. Automobile dealers point to higher interest rates as a

major factor discouraging sales. On the other hand, dealers in auto parts

and repair materials are reportedly doing well. Gasoline dealers indicate

that sizable decreases in gasoline sales have occurred in recent months and

that inventories are at relatively high levels.

Representatives of the manufacturing sector reported further

declines in unit sales in recent weeks. With decreases in automobile and

truck sales, assembly plants have announced additional layoffs of workers

and so have industries supplying parts for the manufacture of new

automobiles. With the sharp decline in sales of new homes, building

materials industries, such as manufacturers of lumber and connector plates,

as well as manufacturers of appliances and furniture are experiencing a

decline in new orders. A representative of a major chemical firm reported

that depressed sales of automobiles and homes are beginning to affect the

sales of plastics and fiber products.

Nevertheless, manufacturing activity of industries producing

energy-efficient and defense-related equipment remains quite strong.

Foreign demand for a number of products, such as chemicals and plastics,

likewise remains strong. While demand for capital goods appears to be

holding up well in general, several firms are reported to be currently

reviewing their capital expenditure budgets in view of the decline in

economic activity.

Residential building activity remains at a virtual standstill

throughout the District. Most home builders have cut back a substantial

portion of their work force, and some are reported to be near bankruptcy.

Reports of falling interest rates are encouraging, but some feel that the

decline in rates will not generate sales in the immediate future because of

the expectation that rates will fall still further. Nonresidential building

remains fairly strong, reflecting large backlogs of projects. General

contractors report that major projects continue to be funded, but that many

small jobs are being postponed or cancelled.

Loans by major commercial banks in the District to business,

consumers, and real estate developers have declined sharply. Only

agricultural loans have posted gains, reflecting seasonal increases in these

loans at planting time. Savings and loan associations are also making very

few mortgage loans. As a result of the drop in loan demand, interest rates

have begun to fall rapidly. The prime commercial bank rate has declined

from about 20 percent to 17 1/2 percent, and the mortgage rate from about 16

1/2 percent to 15 percent. Some savings and loan officials indicate that

the mortgage rate is likely to fall even more in the near future, and one

association has already reduced the rate to 12 3/4 percent. In St. Louis,

two savings and loan associations have instigated the new "rollover"

mortgage (which permits an adjustment in the rate charged), but they have

not been successful in marketing this type of loan. Savings and loan

industry representatives are more optimistic about the prospects for

improved profit margins with the decline in money market rates, but point

out that they are still being squeezed by the continuing shift from passbook

savings to higher yielding CD's.

Demand for farm credit is reported to be up from a year ago, but

bankers report that this credit is being supplied at competitive rates. In

a number of communities, bankers are lending to farmers at lower rates than

to others in order to avoid the loss of their customers to the Production

Credit Association.

NINTH DISTRICT - MINNEAPOLIS

The Ninth District economy is closer to a recession than it was a month

ago. Sinoe last month, a decline in farm income, combined with reduced lending

and spending, has increased the number of firms curbing production and laying

off workers. The recession hasn't arrived, though, because investment spend-

ing, manufacturing output, and planting intentions indicate district output is

still increasing.

The Recession Is Getting Closer . . .

Our last report stated that the district had been moving toward a

recession, and in April it moved even closer.

In April farm income fell again. Our last report indicated that a

combination of falling prices and rising costs was reducing farm income. Farm

income fell further last month, as farm prices decreased 4.5 percent between

March and April.

In addition, lending declined further in April. Although interest

rates decreased, they were still very high, and district consumers and busi-

nesses continued to reduce their borrowing. Home loan applications at Minnea-

polis/St. Paul S&Ls, for example, declined 60 percent from April 1979, following

a 30 percent decline in March.

With farm income and lending still falling, spending and production

continued to be curtailed in April. Directors report a further decline in the

sales of general merchandise, autos, homes, and farm implements. In a large

central Minnesota community in April, for example, department store sales were

down 10 to 15 percent from a year ago, whereas in March these sales were down 5

to 10 percent. With less consumer and farm spending, some manufacturers' new

orders are still falling, and some manufacturers continue to curtail production

and lay off workers. Partly as a consequence, Minnesota's initial claims for

unemployment insurance in both March and April were up about 50 percent from a

year ago.

. . . But It Still Hasn't Reached The District

Despite the declines in lending, spending, and farm income, the dis-

trict still isn't in a recession. For a recession to occur, investment spending

and manufacturing output would probably have to decline, and they are still

expanding. Businesses, for example, are still investing, as directors report

considerable nonresidential building, both inside and outside the Minnea-

polis/St. Paul metropolitan area. Although growth has slowed, directors also

report that district manufacturing output is still increasing. One director

attributes this growth to the district's large number of rapidly growing high

technology firms. Another cause of this growth could be that the district's

biggest manufacturers are defense contractors, and district defense spending

has increased 30 percent in the last two years.

On the farm, output is also still expanding. District farmers intend

to plant 4 percent more acres this spring than a year ago. So far, dry, sunny

weather has been helping them achieve this goal. In Minnesota, for example,

normally 20 percent of the corn planting is completed by May 4, but this year 36

percent of the corn was planted by that date. With their planting nearly

completed, district farmers are now hoping for rain to get the growing season

off to an excellent start.

TENTH DISTRICT - KANSAS CITY

Economic activity in the Tenth District is beginning to slow

markedly. Retailers report declining sales and slower increases in

prices. Purchasing agents report a recent slowdown in the rate of in-

crease of input prices. Inventories in retail and manufacturing are

being reduced. Savings and loans report reduced savings inflows ana

mortgage commitments, and homebuilders report significant declines in

the building and sales of new homes. The winter wheat crop is in fair-

to-good condition, while supplies of fed cattle will be tight in coming

months. Bank loan demand has continued to weaken, particularly for con-

struction and real estate activity. Deposit growth remains generally

steady, though demand deposits are declining at some District banks.

Retail activity in the Tenth District is weakening. Some re-r

tailers report only slight gains in January-April dollar sales over a year

ago, while others report significant declines. Appliance and furniture

sales have been particularly weak. All retailers contacted report

declines in sales since mid-March, and all expect continued declines

throughout the remainder of 1980. Most retailers report slower price

increases in recent months, along with declining profit margins. Inven-

tory levels are generally considered too high for current sales expec-

tations and are to be trimmed throughout the remainder of the year.

Most purchasing agents report that input prices have risen by 10

per cent or more over the last 12 months, although many report that prices

have recently begun to stabilize. Input availability is not a problem,

with lead times decreasing throughout the District. Materials inventories

are cautiously being held down. Over half the firms contacted have excess

plant capacity, and about one-third of the companies have either idled some

workers, or plan to do so soon.

Savings and loan associations contacted in the Tenth District

report that savings inflows are down substantially from last year. Mort-

gage commitments are down significantly, due to a shortage of funds and

high mortgage rates. However, mortgage rates in the District have recently

fallen to below 16 per cent, and are expected to fall further throughout

the year.

Tenth District homebuilders' associations report that housing

starts are down about 50 per cent from last year, with single-family housing

starts leading the decline. Many association spokesmen believe that home-

building activity will begin to improve within the next three months. Al-

though sales of new homes have been off considerably, there is not a

critically high inventory of unsold homes, and builders are not reducing

home prices significantly. Building materials are readily available through-

out the District at stable prices.

The winter wheat crop throughout the Tenth District is reported to

be in fair-to-good condition at the present time. Commodity groups are

forecasting a large crop for 1980. The Wheat Quality Council has projected

a 362 million bushel crop for Kansas, 12 per cent below the record crop of

1979. However, area bankers are less optimistic in their projections,

observing that crop conditions are much more variable than last year.

Wheat prices have shown an increase in recent days reflecting concern about

the lack of rainfall necessary for continued crop development in the winter

wheat area and very dry conditions in the spring wheat areas of the U.S. and

Canada. Total U.S. wheat acreage is expected to be up 11 per cent over 1979.

Supplies of fed cattle will be tighter in coming months, probably

producing some increase in cattle prices. Cattle currently being quarantined

in feedlots because of DES implants will start coming on the market in about a

week. That may result in only a short-term increase in slaughter weights

and numbers marketed.

A survey of bankers in the Tenth District indicates a marked decline

in loan demand in the last two months. Most bankers believe the decline in

loan demand is primarily the result of high lending rates, but they also re-

port that uncertainty about the current recession is contributing to the

softening of loan demand. While the demand for all types of loans is generally

weak, the demand for construction and real estate loans appears to be virtually

nonexistent. Several bankers report continued strength in the demand for con-

sumer loans. However, these bankers also report that they are discouraging this

demand because of the Federal Reserve's Special Credit Restraint Program.

In the past month, the prime rate in the Tenth District has declined

from the 19 to 20 per cent range to the 17 to 18 1/2 per cent range. However,

the majority of bankers on this month's survey have tightened their nonprice

lending terms, primarily because of the uncertainty regarding the effects of

the recession.

Most bankers report their deposit growth to be generally stable. How-

ever, demand deposits are still declining at some banks, as customers continue

to shift their funds into interest-rbearing accounts. Money market certificates

and large CD's continue to account for most of the deposit growth, although

some bankers are no longer bidding aggressively for these deposits.

ELEVENTH DISTRICT—DALLAS

Evidence continues to accumulate to suggest the Eleventh Distr ict

economy is s l iding into recession. Department store sales adjusted for in-

flation are declining, and auto sales continue to deteriorate. Residential

construction is well below the year-ago level, and S&L's report a continued

net outflow of savings. Bank loan demand has softened perceptahly. Factory

output is leveling off, and production cutbacks and layoffs are reported in

a growing number of industries. The brightest spot in the southwestern

economy is oil f ield act iv it ies, which continue to expand.

Department store executives report real sales are declining as

consumer buying is drying up in anticipation of a deepening recession.

Nominal retail sales fell 2 percent in Apri l. Credit purchases have de-

clined as much as 20 percent below last year 's levels, and cash purchases

are not taking up the slack. An increasing number of customers are re-

ported to be paying down their credit balances instead of purchasing new

goods. Inventories have begun to bulge. As a result retailers are step-

ping up price discounting and are placing fewer new orders.

New car sales continue to decline. Sales of domestic models are

estimated to be 40 percent below last spring. Demand for some models, par-

t icularly imports, remains strong but is restricted by high prices and a

limited avai labi l i ty of credit. Dealers report closing only a third of

their potential sales. Many dealers are pushed to their financial limits

by the decline in sales and high inventory costs. Layoffs are on the in-

crease, and several dealerships have closed in the last month.

Residential construction activity is 20 percent below the level a

year ago, and no indication of a turnaround is in sight. Further declines

in interest rates are expected to restimulate mortgage demand, and several

c it ies are providing funds for home mortgages with municipal bond issues.

However, builders indicate i t will take an estimated nine months for the

market to fully recover when the turnaround comes.

Most savings and loan associations continue to report net out-

flows of savings. Overall loan demand continues to decline as most custom-

ers remain priced out of the market. Demand for home improvement loans

continues to increase, but a majority of associations do not offer such

loans.

About one-half of the large monthly reporting holding companies

and banks appeared to exceed the 9-percent growth in their March reports,

but commercial banks generally report no problems in complying with the

guidelines for loan growth. The situation has eased with the option of

selecting a base period for covered consumer loans and an increased volume

of loan participations. Loan demand by the energy and real estate indus-

tr ies remains strong, although the lack of long-term financing has reduced

the supply of interim construction financing by banks. Consumer loan de-

mand is slowing and usage of bank credit cards is down signif icantly from a

year ago.

While agricultural loans are readily available at D i s t r i c t

banks, bankers express concern over the abil ity of farmers to repay borrow-

ings. Some loan carryovers from the last two years have been absorbed by

federal programs, leaving banks in a better position to meet r i s ing credit

needs in agriculture. But r is ing production costs and fa l l ing commodity

prices are creating concern over the outlook for farm credit.

While most Distr ict manufacturers continue to report high levels

of capacity ut i l izat ion and normal order backlogs, conditions are consid-

ered bleak for suppliers to the residential construction industry. S ign i f -

icant cutbacks in employment prevail in the fiberglass and aluminum extru-

sion industries, and more layoffs are expected in 30 to 60 days. Apparel

manufacturers also report a rise in layoffs and factory closings. Produc-

ers of construction steel and cement are allowing attrit ion to reduce

employment levels. However, the capital goods and defense industries are

proceeding with expansion and hiring plans. The decline in autos and hous-

ing has put chemical producers in a squeeze. Shipments of chemicals are

down, inventories are up, and prices of feedstocks are r i s ing, reflecting

the ongoing increases in prices of oil and gas.

Dr i l l i ng activity in the D i s t r ict states is up a third over a

year ago and at a 24-year high. Both major and independent oil producers

are reported to be cutting back production levels to take advantage of

preferential tax rates under the windfall profit tax.

TWELFTH DISTRICT — SAN FRANCISCO

Sluggish retail sales, a slumping forest-products industry, and a

very weak housing market have led to a general softening of business activity

in the Twelfth District. Most analysts agree that a recession has finally

overtaken the Western region, especially in the timber area stretching from

Northern California, across Oregon, and into Washington and Idaho. However,

sharply falling mortgage interest rates in early May provide some hope that

the housing industry will come out of the doldrums. Rail shipments of autos

and lumber are declining, and the downturn is now spreading to other types

of rail traffic. On the farm front, good growing weather has been apparent

in most areas except California's Central Valley, but farmers are complaining

about low prices for their products as well as the high cost of labor,

materials and money.

In Southern California, the signs of an economic slowdown have

included a softening of supermarket and department-store sales, significant

personal savings withdrawals to finance purchases, a downturn in credit-

card transactions, continued weakness in consumer-durable sales, bankruptcies

among established auto dealers, and a marked lateness in utility-bill payments.

Major Southern California department stores recorded a sales decline of one

percent between April 1979 and April 1980, which means a substantial decline

in real terms. Thus, nondurable-goods sales are now showing the same

weakness that has been apparent in durable-goods sales since last fall.

Other sections of the District all report similar developments.

The lumber industry remained very weak in April, with 54,000 lumber

mill workers and at least 13,000 plywood workers out of jobs or working a

curtailed workweek. The plywood industry has been operating at less than

half capacity. About 55 lumber and plywood mills in Oregon have curtailed

operations, and some have even shut down permanently, partly because of the

recession but also because of the erosion of their timber base. Some major

installations have furloughed one-sixth or more of their workers. On the

other hand, two major forest-products firms reported record first-quarter

profits, reflecting heavy export demand and strong domestic demand for pulp,

paper and packaging materials.

Real-estate activity has remained very soft throughout the West.

Small builders in particular have been hit hard by the downturn. Builders

regained some of their optimism in early May, however, when major lenders

retreated rapidly from their 18-percent prime mortgage rate. The nation's

largest savings-and-loan association went all the way to 12 3/4 percent.

In the nonresidential sector, a major contractor says that demand, while

still strong, may decline later because of a lack of long-term financing.

Some areas of strength still remain visible. Defense procurement

schedules are continuing to support the Southern California economy. The

Puget Sound area remains strong because of Boeing's substantial order

backlog. Military business is strong, especially because of Boeing's contract

for the cruise missile. Civilian-aircraft production will be reduced next

year, however, as a reflection of weakness in domestic-airline orders. As

a result, Boeing's workforce is scheduled to stabilize later this year.

Meanwhile, Alaska's state finances are in good shape because of a $3.5-

billion surplus resulting from its oil boom. The legislature has disposed

of part of this surplus by making subsidized mortgages available to residents,

and also by boosting legislative salaries.

On the agricultural front, California's San Joaquin Valley has been

plagued with freak weather, ranging from high-90's temperatures to snow and

rain, during the critical spring-planting period. Dairy producers are

suffering from soft sales and from high operating costs. Northwest grain

farmers continue to feel the after-effects of the Russian wheat embargo.

But crop prospects in the Northwest look good for apples, cherries, hay

and seed crops. A deep snow pack and high water tables promise southern

Idaho farmers their best prospects of the past four years, especially by

allowing crop production in non-irrigated areas.

In the financial sector, most lenders are continuing to tighten

consumer-credit terms. Many credit-card lenders have increased the annual

interest rate, and some have begun to charge annual fees for card use.

Some smaller rural banks report satisfactory operating results because

of a stable deposit base. But a Southern California banker reports limited

availability of funds to lend despite continued heavy demand for loans.